PEER COMPANIES

The big talking point is that of all the GST changes that have been made by the council now, there are only 50 items remaining in that 28% tax slab. What according to you are some of the beneficiaries that one could look at from an investment perspective? Would it be any of the restaurants, would it be any of the listed hotel chains or would you stick to FMCG?

This is overall a consumption boost. There is also a sentimental impact of GST on the basis of what is happening. The retail consumer was being told that every price hike is due to GST. There was a lot of communication issues around GST. With the top slab of 28% tax rate being trimmed to only 50 items, the overall consumption sector will get a boost. For restaurants and all the things, there is no input credit. To that extent, the prices will reflect to the ultimate consumer. From our perspective, consumption as a story will continue to remain strong for the next 12-18 months. FMCG is very broad-based, our bet is more on consumer durables and all the higher end consumption goods.

Also, I have to talk about earnings. What is it that you have made of this mixed performance from L&T? They have managed to stick by with the revenue guidance but the order inflow guidance has been very muted. How far do you think meaningful recovery in L&T is possible before we actually see them upping their guidance eventually?

In about 12 to 18 months. The issue with companies like L&T is that the demand side is only coming from the government and the private sector capex has not really started. But in 12 to 18 months, we expect the broad-based order book to start bloating up. Companies like L&T will be on the forefront in terms of bagging that because of their track record on completion and their skill set. It is just a matter of another year-year and a half before the infra pack actually turns much more positive.

Have to talk about telecom then. The big news this morning has been that Idea has okayed its standalone tower business sell to ATC telecom. It is for an enterprise value of Rs 4000 crore. We chatted with Himanshu Kapania as well and he said that it is going to be a split. They are going to use this proceeds of the stake sale for debt reduction as well as capex and they are going to be pumping in more money into the infrastructure for 4G. How are you reading into this news and how should the markets perceive it?

The news is very positive. However, this is something that is to do with that industry’s consolidation and getting better. From a stock market perspective, we still believe that we are underweight telecom. We still do not know who is going to be the real winner coming out of it from a three to five year perspective. So our approach is to wait on the sidelines and watch but all of these developments are good for the health of the sector and we are very keen to get more such news going forward but from an investment perspective we are still some time away from actually taking a bet on telecom.

Some very impressive numbers from SBI. SBI has been a key winner in that sense ever since the PSU bank recapitalisation got announced and now more conviction from market men after their earnings performance as well. What do you do after the recent run up has already played out in SBI? Do you still buy into the stock for a longer term perspective?

Good quality public sector banks have always been on our buy list, so there are no issues on that but in terms of broadening the basket beyond the top banks, one shoul be cautious because we still do not have clarity on which banks are going to get their recapitalisation number one.

Second is that the recapitalisation is not going to address the NPA issue, it is only taking care of the erosion in capital of past NPA provisioning but real NPA issue has to be addressed through the RBI mechanism, the insolvency act plus the bank mergers. Now that is an interesting news to watch out for because if there is a good bank and they are going to back it now, if they merge a very weak bank with it then as you saw with SBI and its associate banks the NPA provisioning of the weaker banks comes and hits the merged entity.

You got to be cautious and watch and see where the finance ministry and RBI are going. Definitely mergers are one way forward and they have to happen. In the course of the next financial year, we expect significant amount of consolidation in the PSU banking space and the winners after that because the good quality banks which actually absorb these banks are the ones who need support and we believe they will garner a major share of the recapitalisation funds.

I think there is a very interesting wait to see who gets the recapitalisation money and which bank gets merged with which bank.

The sense which I am getting from the industry veterans now is that the risk reward ratios is not favourable in midcap stocks. You have always argued that look for those who are making these tall claims. Perhaps they do not know how to ride their right businesses are you still of this view?

The midcap space should deliver at least 200 to 400 bps greater return than the large cap pack. The key is that it is accompanied by volatility. You just have to wait longer in terms of getting midcaps to outperform large caps. If you take shorter time buckets, then what you say is true. The issue with midcaps is that most people tend to look at the index and then take a call but you know the index has hardly 20% of the total stocks available to a fund manager whereas in large caps, your overall universe is pretty much correlated with the indices whether the Sensex or the Nifty.

The key element here is there is enough opportunity outside of the indices for fund managers to deliver value whereas within the indices the composition is decided in a pre-decided formula and if a wave happens in a particular sector, it tends to take it out where the risk reward perception comes in.

To me a good quality fund manager studying individual stocks in the mid and small cap can still deliver significant alpha both over the index as well as over the large cap space.

When one looks at the earnings, this quarter has been weak for real estate. Both Puravankara and DLF numbers have shown a weak quarterly performance. Having said that, there are those concentrated south players and especially in particular in the Bangalore markets like Sobha as well as Prestige which continue to deliver good numbers. The rest of the region has not done so well. What do you make of the numbers and how should one look at these stocks from an investment perspective?

Basically real estate is one sector which is very localised because local demand and supply situations are dramatically different.

Second, post demonetisation, the sector has seen a very severe impact because probably among the various sectors, the highest cash component was in the real estate sector.

The third thing is the GST and the fourth is the of course the RERA act coming in and cleaning up.

So what is happening is that those real estate players who are already sunk into projects on the high end side are the ones who are facing trouble but those who are able to catch on to the government’s view on the affordable housing are very bullish on the housing part of the real estate sector. We have done some study and if you look at the effective way of my percentage of a person’s average salary, you take a guy earning 30 say 8 to 10 lakh per annum and have a house of 30 to 40 lakh . Today the EMI as a percentage of his salary is about 22% which is a probably at a decadal low.

We believe that housing as a sector is said to do well and that is likely to be more at the low end and at the affordable housing in those kind of a spaces. Our view on real estate is very polarised where we believe that those who are betting on the high end and especially in geographies where there is a lot of supply is still going to face challenges. In those states which have adopted the RERA Act, again it is going to be an issue whereas those who are more in low-cost affordable housing, the story is on a good ride there.